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Community Health warnings could scuttle Health Management talks

By Deena Beasley

(Reuters) - A warning from hospital operator Community Health Systems Inc of declining patient admissions and news that the U.S. government is stepping up a probe of how it handles Medicare patients will complicate efforts to buy rival Health Management Associates Inc, analysts said on Friday.

They said a resulting 9 percent price drop in Community Health's shares together with lower earnings have significantly raised the cost of financing a deal.

"This makes a deal much, much more difficult to do from a leverage perspective," said CRT Capital Group analyst Sheryl Skolnick. "It makes it a lot harder to finance and a lot harder to convince shareholders that it is a good thing."

Community Health said late Thursday that its second quarter profit would fall from a year earlier due to weak admissions volumes in May and June, bad debts, and deteriorating reimbursements.

The Franklin, Tennessee, company also said the Department of Justice had subpoenaed more of its employees in a wider investigation into admissions of patients covered by Medicare, the government's health plan for the elderly.

"Based on what I understand them to say, this situation is not going to be resolved anytime soon," Skolnick said.

Analysts at Oppenheimer now estimate that the hospital chain will earn 51 cents a share for the quarter, well below the consensus Wall Street estimate of 92 cents a share.

"This makes a deal for HMA more difficult," said one industry banker, who asked not to be identified because he is not authorized to speak to the media. "This might make it pause."

Representatives of Community Health and Health Management did not immediately respond to requests for comment.

Health Management, based in Naples, Florida, has been seeking to fend off a campaign from hedge fund Glenview Capital Management, which has threatened to launch a proxy battle against the company. Glenview owns a 14.6 percent stake in the hospital operator.

Health Management said in June that it had hired Morgan Stanley and law firm Weil, Gotshal & Manges to consider strategic alternatives.

Earlier this month, several sources familiar with the matter said that Community Health was a likely buyer, while hospital chains including HCA Holdings Inc and LifePoint Hospitals Inc were also exploring a potential deal.

In early afternoon trading on Friday, shares of Community Health were trading down 9 percent at $43.08, while shares of Health Management were down 4 percent at $15.70. Shares of LifePoint were down 3.7 percent at $49.46 and shares of HCA had fallen about half of a percentage point to $38.99.

"Volume headwinds have kept us cautious on the group, and we believe medical demand will remain below expectation through the balance of the year," BMO Capital Markets analyst Jennifer Lynch said in a note to investors on Friday.

Since President Barack Obama's healthcare reform legislation was passed in 2010, there has been a wave of consolidation - more than 650 deals for hospitals, according to Thomson Reuters data - as companies in the sector seek to protect themselves against increasing costs and lower reimbursement fees from the government.

(Additional reporting by Jessica Toonkel; Editing by Grant McCool)

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